Pension restructure could raise Inheritance Tax liability

High earners who will save for their pension under the government’s planned Personal Accounts Scheme may face an Inheritance Tax liability on part of their benefits. 

Latest details from government have indicated that lump sum death benefits provided under the Personal Accounts Scheme would be subject to Inheritance Tax. 

This is a major difference to other company pension schemes, where death benefits are generally paid exempt from Inheritance Tax. 

The news is another reason for employers to consider setting up their own pension scheme, as an alternative to the Personal Pension Scheme, if they do not have a scheme already. 

Inheritance Tax Liability 

Individuals currently have an allowance before Inheritance Tax of £325,000 (£650,000 for a couple), which applies to the value of their ‘estate’. 

The ‘estate’ is defined as the value of all property, savings and insurances, and other assets, less any debts and liabilities. 

Funds above the allowance are subject to Inheritance Tax at 40%. 

The Personal Accounts Scheme

 The Personal Accounts Scheme will automatically enrol all workers not currently saving for a pension. Once fully up and running, employers will pay 3% of an employee’s salary into his pension, with the employee paying 4% and government providing a further 1% in tax relief. 

Certain aspects of the Scheme will impose considerable administration and contributions expenses on employers. In particular, all employees must be registered for the Scheme from day 1 of their employment, which will add significantly to the costs of companies that use large numbers of seasonal employees, as pensions contributions for these employees will have to be paid.